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It’s no secret that being a director comes with a long list of responsibilities and duties, but which of these directors duties are legal obligations in the UK?
Fortunately, the Companies Act 2006 expressly outlines the duties of a director for UK companies, so directors have plenty of practical guidance.
While directors will have additional obligations and responsibilities that go beyond the general statutory duties covered in the Companies Act 2006 guidance, ensuring you’re meeting these lawful requirements is the best place to start.
Here at Wilson Browne Solicitors, our team of legal professionals have years of experience supporting businesses, helping them to operate smoothly and avoid penalties following non-compliance with the latest UK company law changes – including directors duties in the Companies Act.
What is the Companies Act 2006?
The Companies Act 2006 is piece of UK legislation that forms the basis of company law in the country. The main source for company law governing in the UK, it’s composed of over 700 pages and a mammoth 1,300 sections. The Act superseded the Companies Act 1985, with the final stage of the new act being brought into force in October, 2009.
What are the Companies Act 2006 directors duties?
Within part 10 of the Companies Act 2006 legislation, chapter 2, ‘A company’s directors’, explains the seven primary general duties of directors. To help you understand the role of company director, we explore each one of these directors duties per the Companies Act 2006, set out under sections 171–177 of the Act in more detail below.
Duty to act within powers
Acting within powers simply means that a company director must act in accordance with the company’s constitution (as well as their articles of association and the company’s shareholders instructions) and only use their powers for the purpose for which they are conferred.
In basic terms, this means that company directors mustn’t use their powers to further their own interests. For example, a company director may abuse their power by issuing too many shares to an individual with similar interests to the director, interests that do not take into consideration the company’s best interests.
Duty to promote the success of the company
Previously, as per the 1985 Act, this directors duty was to act in the best interests of the company. Now, the Act stipulates that the director of company should act in a way that they believe, in good faith, will likely support company success. In turn, this success should benefit its members as a whole – not just shareholders, but all stakeholders.
When making decisions, the director should bear in mind six factors. This includes any likely long-term consequences, the interests of the employees, the needs of the company’s relationships with their suppliers and customers, and the potential impact of the decision on both the community and environment.
They should also consider the desirability of the company maintaining a reputation for high standards of conduct, and the need to act fairly as between members of the company. No singular factor is more important than another. Instead, each factor must be considered individually by the company director.
Most responsible company directors will already be taking each one of these factors into consideration when making decisions, this Act merely provides statutory support for this process.
Duty to exercise independent judgment
When undertaking a joint venture, an organisation will often appoint a director to safeguard its investment. However, if a company director becomes too concerned with the interests of the shareholder that appointed them, they can risk losing this independent judgement.
Ultimately, a director of a company must exercise independent judgement. However, the Act stipulates that this duty isn’t infringed by any agreements duly entered into by the company that might restrict company director exercise of discretion. Similarly, the duty hasn’t been violated if the company director is acting in such a manner as authorised by the company’s constitution.
Duty to exercise reasonable care, skill and diligence
This Act requires the director of a company to use reasonable care, skill, and diligence when making decisions and taking action. Put simply, this means that the director must have the necessary knowledge, skills, and experience to be appointed to this significant position.
A company director will also be required to make a reasonable input into the running of the business and will be held to a higher standard than merely having a basic level of competence. They should have relevant special skills and experience that ensure they can carry out the functions required of a director in relation to the company’s constitution.
Duty to avoid conflicts of interest
The directors duties to promote the success of the company and exercise independent judgement provide some crossover with this next duty – the duty to avoid conflicts of interest. This includes avoiding both direct and indirect interests that could conflict with the interests of the company.
These conflicts can include not only a conflict of interests, but also a conflict of duties. For example, a director using company information for their own purposes would represent a conflict of interests and a breach of duty.
The Act also states that this duty is particularly applicable to the exploitation of property, information, or opportunity – regardless of whether the company could benefit from this exploitation. It’s important to bear in mind, however, that the duty isn’t infringed if the situation cannot ‘reasonably be regarded as likely to give rise to a conflict’ or if it’s been authorised by the company directors.
This authorisation can only be given by the company directors providing the company’s constitution doesn’t invalidate the authorisation, and where the company is a public company with a constitution that allows the directors to authorise the matter.
The authorisation can only be considered effective if the director in question (or any other interested director) isn’t counted in the minimum number of people needed to hold the meeting to discuss the matter, and the matter can be agreed to without taking into consideration their votes.
Duty not to accept benefits from third parties
Where a ‘third party’ refers to a person with no association to the company, company directors must not accept benefits from them on the basis the benefit has been provided due to them being a director or doing (or not doing) something in their role as a director.
Bribes represent one of the most common breaches of this director duty, but confusion can arise as gifts and benefits come in many forms. From sporting invitations to gift baskets and hospitality, it can be difficult to draw a line between what is acceptable and what comprises a breach of the third party benefit duty.
Generally, a company director can accept the benefit if no reasonable person would believe it to create a conflict of interest or a conflict of duties. To make this decision easier, however, it’s often a good idea to have a gift acceptance company policy in place to dictate when these gifts can be accepted.
Duty to declare interest in proposed transaction or arrangement
Transparency is essential when it comes to avoiding conflict of interests and duties. As a result, another company director duty includes declaring both the nature and extent of interest (be it direct or indirect) they might have in any potential transactions or arrangements with the company.
This declaration of interest in a proposed transaction or arrangement can (be needn’t) be made at a directors meeting, or by notice to the directors in according with either section 184 (notice in writing) or section 185 (general notice).
General notice can be given if a director has a continuing interest (such as being a shareholder of a supplier to the company) in proposed transaction or arrangement. If the declaration becomes inaccurate or incomplete, an additional declaration or update must be made by the company director.
It’s also worth noting that the declaration must be made prior to the company entering into the relevant transaction or agreement, no agreement should be signed until this declaration of interest has been received.
If the director is not aware of the transaction or arrangement, then a declaration of interest is not required. Similarly, a director needn’t declare their interest if it cannot reasonably be regarded as likely to cause a conflict or interest or duty, or other directors are already (or ought to be) aware of the interest.
They also needn’t declare their interest if the matter concerns the director’s service contract terms which have of are to be considered by either a meeting of directors or a committee of the directors appointed under the company’s constitution.
In the event that a director joins a company with a pre-existing transaction or arrangement that they have an interest in, they must declare this ‘as soon as reasonably practicable’. If a company director fails to declare their interest in an existing transaction or arrangement company contract, this represents not only a breach of duty as a director, but it is also a criminal offence and they could be subject to a fine.
Arrange a business health check
If you want to ensure that you’re meeting all the duties of a director, please don’t hesitate to contact Wilson Browne Solicitors and enquire about our business health check services today. Whether you want to ensure GDPR compliance or investigate asset protection, our expert team can help.
To prevent non-compliance with the Companies Act 2006 directors duties, especially as the legislation evolves, an experienced business solicitor is essential. This is why we’ve made getting in touch with our team as straightforward as possible by opening Wilson Browne branches across the UK.
With offices in Corby, Kettering, Wellingborough, Higham Ferrers, Leicestershire, and Northamptonshire, we welcome client visits to discuss your directors duties health check requirements. We can also meet you at another location that’s more convenient for you, if desired.
To find out more about the duties of directors and the Companies Act 2006, our services, prices, or our team of legal professionals, please don’t hesitate to speak to our corporate and commercial solicitors on 0800 088 6004. As the first chat is always free, you don’t have to worry about hidden fees with our transparent prices.
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